FTI INSIGHTS Report
4th Quarter 2017
Economic & Real Estate Report
Contents Introduction Introduction ...... 1 Although the 4Q17 GDP advance estimate indicated that growth Summary of Key Economic Indicators ...... 2 softened, many key economic indicators signaled strength within the U.S. economy to end 2017, including a) unemployment rates 5‐Year Graphical Snapshots of Selected Economic Indicators ...... 3 remaining at a 17‐year low, b) the escalation of job creation to Labor Market ...... 4 its strongest quarterly pace during the year, c) steady business Gross Domestic Product (GDP) ...... 5 investment, d) consumer confidence levels lingering near 17‐ year highs, e) increasing home values, f) rising retail sales and g) Institute for Supply Management (ISM) Manufacturing Index ...... 5 robust construction outlays. Stock indices continued to reach Construction Spending ...... 6 new highs during 4Q17, fueled by the anticipation of corporate The Architecture Billings Index (ABI) ...... 7 tax cuts resulting from the passage of the Tax Cuts and Jobs Act (TCJA), strong corporate earnings and future economic growth. State of the Housing Market ...... 7 Strengthening domestic demand also reflected in a widening PwC Real Estate Investor Survey...... 9 trade deficit to end the year. Stronger global growth and a 4Q17 Survey Highlights ...... 9 weakening U.S. dollar have benefitted U.S. exporters, which has PwC Real Estate Barometer 4Q17 ...... 9 bolstered the U.S. manufacturing sector and driven orders higher for factory, industrial and durable goods; however, RCA Commercial Property Price Index (CPPI) ...... 10 imports have increased at a faster rate due to brisk consumer Green Street Commercial Property Price Index ...... 11 outlays, which have, in part, sent the savings rate to a 12‐year low. Economists believe the weaker dollar has resulted from a Commercial Property Sales Analysis ...... 11 resurgent European economy that is driving more investors to NCREIF Property Index ...... 13 the Euro and increased U.S. political dysfunction. Equity REIT Analysis ...... 15 In November, Jerome Powell was chosen to replace current Fed FTSE National Association of REITs U.S. Real Estate Index ...... 15 Chair Janet Yellen in February 2018. At its December Federal Stock Market Recap ...... 16 Open Market Committee meeting, the Fed raised its benchmark interest rate (between 1.25% and 1.50%) for the third time in Capital Raising ...... 16 2017 after expressing optimism regarding the labor market. Commercial Lending ...... 16 During 4Q17, the Fed also began the reduction of the $4.5 Commercial Mortgage Backed Securities (CMBS) Market ...... 17 trillion balance sheet it acquired in the wake of the financial crisis. Property Sector Overviews ...... 18 Leading commercial information providers and real estate Office ...... 18 brokerages generally reported positive market fundamentals Industrial ...... 19 within the major sectors despite challenges distinct to each asset Retail ...... 20 class. Commercial property indices from CoStar, Green Street and NCREIF revealed surging pricing growth for industrial assets Apartment ...... 21 and generally moderating growth for most of the other major Hotel ...... 21 commercial property types. The growing gap between buyer and Forecast ...... 22 seller pricing expectations continued to contribute to softer sales volume during 4Q17.
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Real estate debt market conditions remained favorable during rise. The gains among the leading indicators were 4Q17. CMBS issuances increased to their highest level since widespread, but were mostly driven by strength in new 4Q17 while CMBS delinquencies further declined. According to manufacturing orders, improving stock markets and the Mortgage Bankers Association, commercial and multi‐family financial conditions. loan lending escalated from the prior quarter and year, but the . Retail Sales Increase. Retail sales rose 0.4% in December, Fed reported demand for CRE loans was largely unchanged. the fourth consecutive monthly gain. During 4Q17, retail Sustained investor demand allowed capital raising by REITs to sales increased 5.5% YoY, driven by the strongest holiday increase more than 30.0% year‐over‐year (YoY). season since 2010 (National Retail Federation). Total 2017 Summary of Key Economic Indicators retail sales increased 4.2% YoY and reflected the strongest year for sales growth since 2014. In 2017, sales at non‐ . GDP Growth Slows The advance estimate showed that store retailers, mostly online‐shopping outlets, also 4Q17 U.S. GDP increased at a 2.6% seasonally adjusted increased 12.7% from the prior year. annualized rate, down from 3.2% in 3Q17. . Consumer Inflation Slows. The headline Consumer Price . No Change in Unemployment Rate. Despite job gains, the Index (CPI) increased 0.1% in December, following a 0.4% December unemployment rate remained at 4.1% for the rise in November, which was primarily due to a 2.7% decline third consecutive month. in gasoline prices. Core inflation, which strips out food and energy prices, rose 0.3% in December, its largest gain since . Job Openings Decline. Despite more workers increasingly January 2017, and has increased 1.8% during the past 12‐ leaving jobs, indicative of greater confidence in finding new month period. positions, job openings fell to a seven‐month low in December. Still, there were about 5.8 million job openings . Industrial Production Rises. U.S. industrial output increased at the end of December, a 4.9% YoY increase. 0.9% in December, primarily due to a surge in demand for heating. Manufacturing output, accounting for more than . Employment Cost Index (ECI) Surges. Total employment 70% of industrial production, rose at a 7.0% rate in 4Q17, costs, including wages and benefits, increased 2.6% in 2017, the largest gain since 2Q10. For all of 2017, industrial matching the 2015 increase. Of significance, this output increased 1.8%, its first gain since 2014. represented the strongest growth since 2008. Strength was evident in private sector where wages and salaries posted a . Durable Goods Orders Increase. Driven by a 55.3% increase 2.8% YoY increase, matching the best gain of this current in orders for military aircraft and a 15.9% jump in civilian‐ economic expansion. airplane orders, U.S. durable goods orders increased 2.9% in December, the largest gain in six months. During 2017, . Small Business Optimism Falls. According to the NFIB Small durable‐goods orders increased 5.8% YoY. Business Optimism Index, small business confidence declined in December from the record high level of the . Factory Orders Rise. For the fifth consecutive month, prior month. Recent weakness was largely driven by factory orders increased. December’s 1.7% advance was declines in expected business conditions, but more business fueled by sharply higher sales of defense and non‐defense owners reported escalating sales during the month. It was aircrafts and parts. YoY, factory orders were up 8.4%. Of reported that staffing challenges remain a concern. concern, core capital goods (non‐defense capital goods excluding aircrafts) fell 0.6% in December. . Consumer Confidence Slips. Although December’s consumer confidence, as measured by the Conference . ISM Nonmanufacturing Index Declines. Although the Board and University of Michigan Index, pulled back, service sector index fell in December, primarily due to the readings remain at historically high levels. slowdown in new orders, the index still signaled moderate growth to end the year. . Dodge Momentum Index (DMI) Increases. After recording its third consecutive month of gains, the DMI is at its . Consumer Borrowing Stays strong. In December, consumer highest level of the current expansion. The latest reading credit increased $18.4 billion, driven by a 6.0% increase in indicated escalating demand for non‐residential projects. revolving credit (credit cards) to its highest level on record. Month‐over‐month (MoM) the institutional building During 4Q17, consumer credit increased at a 7.7% annual component increased 10.4 points and the commercial rate, the strongest pace of the year. building component rose 1.2 points.
. The Leading Economic Index (LEI) Rises. In December, the LEI increased 0.6%, marking the 16th consecutive monthly
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5‐Year Graphical Snapshots of Selected Economic Indicators
The following charts depict historical trends for several key economic indicators.
Effective Federal Funds Rate Trade Weighted U.S. Dollar Index (DTWEXB) Historic and Current Figures US Dollar Value Against Major U.S. Trading Partners
1.4% $130 Dec 2016‐ Index climbed to 1.3% Dec 2017‐ 4th 25 BPS interest rate hike ‐ rates range between 1.00 % and 1.25% nearly a 14‐year high tied to bets on pro‐growth policies under 1.2% $125 June 2017‐ 4th 25 BPS interest rate hike ‐ rates range between 1.00 % and 1.25% President‐elect Trump 1.1% Mar 2017‐ 3rd 25 BPS interest rate hike ‐ rates range between 0.75 % and 1.00% 1.0% $120 Mar 2015‐ Index climbed more 0.9% 16% during prior 9 months due to Dec 2016‐ 2nd 25 BPS interest rate hike ‐ rates range between 0.50 % and 0.75% the strengthening American 0.8% Average $115 economy vs. global economies 0.7% Dec 2015‐ 1st interest rate hike since June 2006 0.6% Sept 2017‐ Index falls to $110 lowest level since early 2015 0.5% on reduced optimism for a Dec 0.4% Average Fed interest rate hike $105 0.3% 0.2% $100 0.1% 0.0% Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec $95 Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 17 16 15 14 13 17 17 16 16 15 15 14 14 13 13 12 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 17 16 15 14 13 17 17 16 16 15 15 14 14 13 13 12
Source: St. Louis Federal Reserve Board Source: St. Louis Federal Reserve Board
Inflation ‐ All Urban Consumers – (CPI‐U) West Texas Intermediate (WTI) Crude Oil Prices Historic and Current Figures (YoY) Price Per Barrel
3.0% $120 Feb 2017 ‐ Annual inflation During 2017, oil rate at 2.7%, its highest $110 June 2014 ‐ $108 per barrel prices averaged 2.5% $51 per barrel, up point since Mar 2012 $100 from $43 in 2016. In December, the 2.0% price per barrel $90 reached more than $60 on $80 1.5% supply cuts and Average political tensions $70 Average in Saudi Arabia. 1.0% 2017 annual $60 inflation rate at 0.5% 2.1% is the $50 highest since 2012 $40 0.0% Feb 2016 ‐ Crude oil plunges to $26 per $30 barrel, down 75% from June 2014, due to mounting global headwinds. $20 Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec ‐0.5% Apr Aug Dec Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 13 14 15 16 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 12 13 13 14 14 15 15 16 16 17 17 13 14 15 16 17 12 13 13 14 14 15 15 16 16 17 17
Source: St. Louis Federal Reserve Board Source: St. Louis Federal Reserve Board
10‐Yr Treasury Rates Dow Jones and S&P 500 Averages Historic and Current Figures Historic and Current Figures (Closing Average for Day)
3.2% DJIA S&P 500 Dec 2013‐ 10‐Yr treasury reaches 3.03%, 25,500 2,800 amidst talks that Fed would end latest Mar 2017‐ 10‐Yr treasury reaches 2.62%, round of quantitative easing the highest level since Sept 2014 24,500 November 2017 ‐ DJIA eclipses 24,000 and 2,600 2.8% 23,500 S&P 500 eclipses 2,600 for the first time
22,500 2,400 21,500 2.4% 20,500 2,200
Average 19,500 2,000 18,500 2.0% DJIA Average 17,500 1,800 16,500 During 2017, DJIA gains 25% 1,600 1.6% 15,500 and S&P 500 Jul 2016‐ 10‐Yr treasury closed below 1.4%, resulting from 14,500 gains 19% from declines in global gov't bond yields following the U.K.’s vote to the prior year 1,400 13,500 quit the European Union. 1.2% 12,500 1,200 Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 13 14 15 16 17 12 13 14 15 16 17 13 14 15 16 17 13 14 15 16 17 12 13 14 15 16 17 13 14 15 16 17 DJIA S&P 500 Source: St. Louis Federal Reserve Board Source: Yahoo Finance
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As shown below, the unemployment rate has declined 370 BPS Labor Market since December 2012. The current unemployment rate is 160 Despite a hiring slowdown at the end of 2017, labor market BPS below the 5.7% average recorded between December2012 fundamentals remain favorable. During December, employers and 2017 and has been below 5% for the past 15 months. added 148,000 jobs, which marked the 87th consecutive month U.S. Unemployment Rate Trends of job growth. During 4Q17, job gains averaged 204,000 per 8.0% 400 month. A total of 2.06 million jobs were added to the economy 7.5% 350 in 2017, marking the seventh straight year of more than 2 million 7.0% 300 job additions. As the economy trends toward full employment, 6.5% 250 economists believe it is reasonable to experience a slowdown in 6.0% 200 job gains. 5.5% 150 5.0% 100 Employment gains were broad‐based during 2017, as the 4.5% 50 4.0% 0 professional and business services sector added 527,000 Dec‐12 Jun‐13 Dec‐13 Jun‐14 Dec‐14 Jun‐15 Dec‐15 Jun‐16 Dec‐16 Jun‐17 Dec‐17 positions, followed by job gains within the education and health Job Additions/Losses Unemployment Rate Avg Unemployment Rate services (+438,000), leisure and hospitality (+306,000) and Source: Bureau of Labor Statistics construction (+210,000) sectors. After posting job losses in 2016, Consumer confidence indices are considered key indicators of the manufacturing sector added 196,000 positions and 59.000 economic conditions. new jobs were created within the mining and logging sector. The pace of government job additions slowed from 201,000 to The Conference Board. After reaching a 17‐year high in 42,000 during and information services was the only sector to November, consumer confidence fell in December, largely due to shed jobs (40,000). the drop in the expectations component. The cutoff for the survey was December 15th and the impact of the proposed tax The ADP National Employment Report showed a gain of 220,000 reform package increased uncertainty and likely weighed on non‐farm private sector jobs during 4Q17, including an increase consumers’ outlooks. On the positive, Lynn Franco, Director of of 250,000 in December. During 2017, a monthly average of Economic Indicators at The Conference Board, indicated that 212,000 non‐farm, private jobs were created, eclipsing the consumers’ assessment of current conditions improved 181,000‐monthly pace of 2016. moderately and consumers’ expectations remain at historically The December unemployment rate remained at 4.1% for the strong levels, suggesting economic growth will continue third consecutive month, staying at its lowest level since throughout 2018. December 2000. The December U‐6 rate, a broader measure of University of Michigan Index. Despite falling in December, the unemployment that includes Americans in part‐time jobs or not average level of consumer sentiment for 2017 was the highest looking for work, registered 8.1% and has declined 100 BPS YoY. since 2000. Positive sentiment regarding current economic In December, average hourly earnings rose modestly and annual conditions was offset by a slight increase in uncertainty about wage growth increased 2.5%. Despite the addition of two million future economic conditions. Despite remaining unchanged, jobs, the labor force participation rate held steady at 62.7% buying plans for motor vehicles and large‐ticket items are at during the past year and continues to trend near a 40‐year low. favorable levels as the net assessment of current household Below is a comparison of industry employment during the past finances stands a 17‐year high. five years. Below are consumer confidence trends since December 2012. U.S. Non‐Farm Employment by Industry Consumer Confidence Overview Historic and Current Figures (thousands) Historic and Current Figures (thousands) Dec.2017 Dec. 2012 Total Percent Industry Sector Confidence Index Value Employment Employment Change Change 130 Construction 6,993 5,724 1,269 22.2% 120 Prof & Bus. Services 20,943 18,158 2,785 15.3% Leisure & Hospitality 16,050 13,978 2,072 14.8% 110 Educ. & Health Services 23,309 20,932 2,377 11.4% Financial Activities 8,498 7,826 672 8.6% 100 Trade, Trans & Utilities 27,448 25,631 1,817 7.1% Average Dec. 2012 to Dec 2017 90 Other Services 5,810 5,452 358 6.6% Manufacturing 12,539 11,960 579 4.8% 80 Government 22,341 21,887 454 2.1% Information 2,722 2,676 46 1.7% 70
Mining and Logging 727 848 (121) ‐14.3% 60 Total Nonfarm 147,380 135,072 12,308 9.1% 50 Source: Bureau of Labor Statistics Dec‐12 Jun‐13 Dec‐13 Jun‐14 Dec‐14 Jun‐15 Dec‐15 Jun‐16 Dec‐16 Jun‐17 Dec‐17 University of Michigan Conference Board Source: Conference Board, University of Michigan
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Gross Domestic Product (GDP) The following chart summarizes U.S. GDP growth since 4Q12. Gross Domestic Product The advance estimate of 4Q17 GDP showed that the U.S. economy slowed to end 2017, growing at a seasonally adjusted Quarter‐to‐Quarter Growth in Real GDP 5.5% annualized rate of 2.6% after advancing 3.2% in 3Q17. For 2017, 5.0% GDP expanded 2.3%, up from 1.6% last year, but lower than 2.9% 4.5% 4.0% growth recorded in 2015. 3.5% 3.0%
Although annual growth was held back by a weak first quarter, 2.5% Average 2.0% consumer momentum remained strong throughout 2017. 1.5% Consumer spending advanced 3.8% during 4Q17, up 2.2% from 1.0% 0.5% the prior quarter and reflecting the strongest pace since 2Q16. 0.0% Outlays on durable goods increased from 8.6% to 14.2%, marking ‐0.5% ‐1.0% 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 the third consecutive quarter of strong growth, while spending advances on non‐durable goods improved from 2.3% to 5.2% and Source: Bureau of Economic Analysis service spending rose from 1.1% to 1.8%.
Growth in non‐residential fixed investment, a measure of Institute for Supply Management corporate business spending, increased from 4.7% from 6.8% in 4Q17, driven by a 10.8% increase in business equipment (ISM) Manufacturing Index spending, which was the strongest pace since 3Q14. Businesses Manufacturing activity accelerated during 4Q17 as the headline have ramped up their outlays, partly driven by a recovery in oil Purchaser’s Manufacturing Index (PMI) increased to its second‐ drilling and a resurgent global economy. Investment jumped more highest reading of 2017 in December. Driven by steady modestly in structures and intellectual property products such as consumer spending, increased domestic business spending and software and research and development. an improving global economy, 2017 marked the strongest year for manufacturing conditions since 2004. Of the 18 Several indicators held back momentum to end the year, including manufacturing industries tracked, 16 reported growth. The only a widening trade gap. A significant increase in imports (13.9%), two industries reporting contraction during the period included the largest since 3Q10, was fueled by strong consumer spending wood products and textile mills. and more than offset a 6.9% rise in exports, which benefitted from a weak dollar. Reduced inventory accumulation, spurred by Numerous indicators signaled a strengthening manufacturing a strong holiday season, also restrained growth during the sector. New orders, commonly viewed as the leading economic quarter. It was reported that the values of inventories fell by $29 driver of manufacturing growth, reached its highest level since billion during 4Q17. January 2004 and growth in production reached its highest reading since May 2010. Customer inventories fell, indicating Other 4Q17 GDP Key Trends that stockpiles were declining at a faster pace. . Homebuilding rebounded after contracting for two straight Firms were most concerned with the difficulty of finding highly quarters as residential investment increased 11.6%, its skilled labor and the payment of higher wages required to strongest advance since 2Q15. attract such talent. . Overall government spending increased for second ISM member respondents were mostly positive regarding consecutive quarter and the 3.0% recorded growth was the business conditions. Sentiment generally reflected increased fastest pace since 2Q15. Federal outlays increased 3.0%, sales activity, positive business conditions and rising domestic driven by a 6.5% advance in defense spending. State and and international sales. Headwinds generally reflected difficulty local government expenditures grew 2.6%. in finding qualified labor and commodity pricing pressures. . Inflation increased as the personal consumption expenditures index, excluding food and energy, advanced 1.9%, its quickest pace of growth in more than a year.
. Of concern, the personal savings rate declined to 2.6%, the lowest level since 2005 and the third‐lowest on record.
. Disposable personal income accelerated to a 3.9% growth rate in 4Q17, up 2.1% from 3Q17.
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The graph below shows fluctuations within the PMI since December 2013. Construction Spending In December, U.S. construction spending grew 0.7% to a record Purchasing Manager’s Index (PMI) high annualized level, marking the fifth consecutive monthly 61% 60% gain. The latest advance was driven by record‐high investment in 59%
58% private construction projects and a rebound in federal 57% government outlays. During 2017, total construction spending 56% 55% grew 3.8% from the prior year to $1.23 trillion. While spending Average 54% on residential projects advanced by 10.4% during 2017, outlays 53% 52% fell 0.6% for non‐residential projects. 51%
50% Above 50% indicates expansion Private Construction 49% in the manufacturing sector 48% 47% . Comprising 77.0% of total construction expenditures, Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 17 ‐ 16 ‐ 15 ‐ 14 17 16 15 14 17 16 15 14 13 17 16 15 14 outlays increased 0.8% in December to a record high of Source: Institute for Supply Management $963 billion and advanced 2.1% YoY.
The following summarizes key components of the ISM Index. . Outlays on residential projects increased 0.5% in December . Purchasing Managers’ Index (PMI). A reading above 50.0% to the highest level since March 2007. YoY, residential indicates that the manufacturing economy is generally spending increased 6.2%. Outlays on new, single‐family expanding; below 50.0% indicates that it is generally home projects advanced 8.7 YoY in comparison to 4.6% YoY contracting. Manufacturing has expanded for 16 gain for new multi‐family homes. consecutive months. The PMI has averaged 57.6% over the . YoY, non‐residential construction spending fell 2.5%. past 12 months, ranging from 54.8% to 60.8% and the Spending on commercial projects increased (5.7%), while December reading was 59.7%. spending on office and manufacturing projects declined . New Orders Index. A New Orders Index above 52.1%, over (5.0% and 11.7%). time, is generally consistent with an increase in the Census Public Construction Bureau's series on manufacturing orders. The index . increased 5.4% to 69.4% in December, as growth was Institutional outlays increased 0.3% in December and grew 4.4% YoY. Spending on residential projects fell 1.3% in recorded for the 16th consecutive month. December, but still advanced 4.1% YoY. . Production Index. An index above 51.0%, over time, is . generally consistent with an increase in the Fed’s industrial YoY, non‐residential expenditures increased 4.4%. Of note, production figures. The index increased 1.9% in December spending on office and commercial projects increased to 65.8%, marking the 16th consecutive month of growth. 14.3% and 4.3%, respectively.
. Employment Index. An Employment Index above 50.6%, The following chart highlights annualized residential and non‐ over time, is generally consistent with an increase in residential construction outlays since December 2012. During 2017, the variance tightened for most of the year before rising manufacturing employment. Although a decrease of 2.7% during 4Q17. sent the index to 57.0%, growth was recorded for the 15th consecutive month in December. U.S. Construction Spending . Prices index. A Prices Index above 52.4%, over time, is Value of Construction (Seasonally Adjusted Annual Rate)
($ Billions) generally consistent with an increase in the BLS Producer $750 Price Index for Intermediate Materials. In December, an $700 $650 increase of 3.5% raised the index to 69.0%. Raw materials $600 prices have increased for 22 straight months. $550 $500 . Supplier Delivery Index. A reading below 50.0% indicates $450 $400 faster deliveries, while a reading above 50.0% indicates $350 slower deliveries. The delivery performance of suppliers $300 $250 registered 57.9% in December, marking the 20th $200 $150 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep consecutive month of slowing supplier deliveries. Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 13 ‐ 14 ‐ 15 ‐ 16 ‐ 17 13 14 15 16 17 12 13 14 15 16 17 13 14 15 16 17
Residential Nonresidential Variance Source: U.S. Census Bureau
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The Architecture Billings Index (ABI) State of the Housing Market The Architecture Billings Index (ABI) is a diffusion index derived Although existing home sales softened to end the year, U.S. from the monthly Work‐on‐the‐Boards survey, conducted by the housing market fundamentals remained robust during 2017, American Institute of Architects (AIA) Economics & Market lifted by a strong labor market, favorable interest rates and Research Group. The ABI is a leading economic indicator of non‐ healthy gains in disposable income; however, as strong buyer residential construction activity, reflecting an approximate nine interest continued to boost demand for housing, the lack of to twelve‐month lag time between architecture billings and supply, constrained by rising construction and lot development construction spending. Any measure below 50 indicates a costs, has driven up home prices which has led to an unbalanced decline in firm billings from the prior month and a score above U.S. housing market. 50 indicates an increase in firm billings from the prior month. The National Association of Realtors (NAR) reported that existing . Demand for design services remained strong to end the home sales moderated for the first time in five months, falling year as the ABI averaged 53.2 during 4Q17. During 2017, 3.6% in December. Still, existing home sales increased 1.1% YoY architecture firms reported increases in billing for 10 out of during 2017 to a 5.51 million pace, marking the strongest year 12 months. since 2006. Home sales were limited during the year by supply . New design contracts and project inquiries remained robust shortages, specifically at the lower‐end of the market, which has to end 2017 as firms reported work backlogs of about six resulted in growing affordability issues. NAR reported that the months in December, indicating that the pipeline of work total inventory of existing homes fell 10.3% YoY, the 31st will remain strong into the foreseeable future. consecutive monthly YoY decline, to a 3.2‐month supply, which represents the lowest level since the NAR began tracking this . For the fifth consecutive year, billings growth was reported metric in 1999. during every month of 2017 in the South region of the U.S. Following a modest slowdown during the summer, business Below are several key points pertaining to the housing market. conditions improved in the West while growth remained . Median existing home prices increased 5.8%, which marked strong in the Midwest to close the year. Firms in the the 70th consecutive month of YoY price gains. Low Northeast reported a modest decline in billings and mortgage rates and a strong economy have supported generally witnessed softer conditions than other regions. elevated home pricing levels.
. In December, billings growth was positive in all . According to Freddie Mac, the average commitment rate specializations/sectors, and strongest in the residential for a 30‐year, conventional, fixed‐rate mortgage increased (55.4) and commercial/industrial (54.0) sectors. to 3.95% in December. The average rate for 2017 was . Chief concerns among participants included increasing firm 3.99%. profitability, finding qualified labor, the negotiation of . According to ATTOM Data Solutions, 2017 foreclosure project fees, the management of the rising costs of running filings declined 27.0% YoY to the lowest level since 2005 a firm, and the identification of new clients and markets. and are down 76.0% from the 2010 peak.
The following graph shows fluctuations within the ABI on a . The NAR reported that distressed sales comprised 5.0% of national level and by U.S. region since December 2016. total December sales, down 7.0% from a year earlier.
Architectural Billings Index (ABI) . Driven by steady sales and a limited supply, the November (ABI Index Value) 2017 S&P/CoreLogic Case‐Shiller U.S. National Home Price 58 57 Index reported a 6.2% annual gain, the 16th consecutive 56 month of gains of 5.0% or greater. 55 54 . 53 New home sales, which represent about 10.0% of the 52 housing market, fell 9.3% in December, but increased 8.3% 51 in 2017 to 608,000, the highest level since 2007. Builders 50 49 continue to report a shortage of workers and materials, 48 which could limit future building. 47 46 Jun Jul Aug Sep Oct Nov Dec Feb Mar Apr May Dec Jan
‐ . The CoreLogic Home Price Index reported that U.S. home ‐ ‐ 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 17 17 ‐ 17 17 17 17 ‐ 17 16 17 17 17 17 prices increased 6.6% YoY in December. The largest 2017 National Billings Northeast Midwest South West Source: The American Institute of Architects price gains were concentrated in western states, including California, Idaho, Nevada Utah and Washington.
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Below is a breakdown of housing starts versus permits since MacDonald remarked, “Housing market conditions are December 2007. The strength in permits relative to starts improving partially because of new policies aimed at providing suggests homebuilding will likely escalate in the coming months. regulatory relief to the business community.” Housing Starts vs Permits The following is a historical chart comparing the NAHB/Wells
Thousands of units Fargo Housing Market Index and single‐family starts. 1,600 1,400 NAHB/Wells Fargo Housing Market Index
1,200 Housing Market Index Housing Starts 100 1,000 1,000 90 900 800 80 800
600 70 700
400 60 600
200 50 500 40 400 0 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17 30 300 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 20 200 Total Housing Starts Total Housing Permits Average Starts Average Permits 10 100
Source: U.S. Census Bureau 0 0 Dec Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 Housing Starts 17 Housing Market Index Single‐Family Starts Source: NAHB/Wells Fargo; U.S. Census Bureau . Likely due to winter weather conditions, housing starts decreased 8.2% in December to a seasonally adjusted Notable Housing Sale and Pricing Trends annual rate of 1.19 million units. Despite the decline, Below are key housing market statistics as of December 2017. overall 2017 starts increased 2.4% YoY. . YoY, existing home sales increased 3.1% in the South and . Single‐family housing starts pulled back 11.8% in December, 1.5% in the Midwest, but fell 2.6% in the Northeast and but still were up 8.5% YoY. Industry experts still believe 0.8% in the West. that more construction is needed to satisfy pent‐up demand. Multi‐family housing starts increased 1.4% from . YoY, the median price of an existing home increased 7.8% in the prior month, but 2017 starts were down nearly 10.0% the Midwest, followed by gains of 7.3% in the West, 5.8% in YoY. the South and 3.0% in the Northeast. Building Permits . First‐time buyers accounted for 32.0% of sales in December, which was unchanged YoY. . In December, building permit activity fell slightly from the . Properties stayed on the market for 40 days in December, prior month. During 2017, an estimated 1,263,400 housing down from 52 days YoY. units were authorized, up 4.7% YoY. Below is a breakdown of existing annualized housing sales vs. . Single‐family permits improved 1.8% from the prior month supply since December 2017. and are up 8.9% YoY. Multi‐family permits fell 3.9% in December and fell about 2.0% YoY. Housing Sales Existing Annualized Housing Sales vs. Monthly Supply
Builder Confidence Annualized Housing Sales Months Supply 5,800,000 5.6 Marking the third consecutive monthly increase, builder 5,600,000 5.2 confidence in the market for newly‐built, single‐family homes soared to its highest level since July 1999 in December. All three 5,400,000 4.8 index components (sales expectations, buyer traffic and current 5,200,000 4.4 sales conditions) increased, including a considerable rise in buyer 5,000,000 4.0 traffic, which was driven by favorable demographics, rising 4,800,000 3.6 consumer confidence, low inventories and a strong labor
4,600,000 3.2 Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec market. Looking at the three‐month moving averages for Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 17 16 15 17 17 16 16 15 15 17 16 15 17 16 15 14 17 16 regional housing market index scores, developer confidence 15 increased by the highest amount in the Midwest in December. Existing Annualized Home Sales Avg Home Sales Months Supply Avg Months Supply Overall confidence is highest in the West followed by the South, Source: National Association of Realtors Midwest and Northeast regions. NAHB Chairman Granger
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Simple averages of overall capitalization, terminal capitalization PwC Real Estate Investor Survey and discount rates are presented in the following table. The . Institutional and private investors surveyed for the 4Q17 averages reflect the following property types: industrial PwC Real Estate Investor Survey reported that overall cap (flex/R&D, warehouse), office (central business district (CBD) rates (OARs) decreased in 17, increased in 13 and held office, suburban office), apartment and retail (strip center, steady in 3 of the survey’s 33 tracked markets compared to regional malls and power centers). 3Q17. This represented the highest amount of markets PwC Real Estate Investor Survey Historical Results recording increases during 2017. Collectively, OAR’s Investment Rate Analysis increased 11 BPS across the major property types since 8.50%
4Q16. 8.25% . Terminal cap rates increased 7 BPS to 6.67% in 4Q17, 8.00% average discount rate representing their largest quarterly increase in 12 months. 7.75% 7.50%
. Discount rates (IRRs) increased 7 BPS to 7.51% in 4Q17 and 7.25%
recorded no YoY change. 7.00% average terminal cap rate . It was reported that due to inactivity among surveyed 6.75% 6.50% investors, data was not updated within the flex/R&D average cap rate 6.25% market in 4Q17. 6.00% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 4Q17 Survey Highlights Terminal Cap Rate Discount Rate Overall Cap Rate
. OARs increased within five of the major property sectors, Additional 4Q17 Report Insights/Findings led by 33 and 19 BPS increases within the power center and . Despite a prolonged expansion, investors are still generally strip center sectors, respectively. The warehouse (21 BPS) bullish regarding CRE fundamentals in 2018 and continue to and apartment (8 BPS) sectors recorded declines. be focused on investment opportunities to maximize yields.
. The warehouse sector had the lowest OAR at 5.1% followed . Desirable warehouse market fundamentals have continued by 5.3% in apartment sector. Flex/R&D properties had the to push occupancy levels to record‐high levels, but investors highest average OARs at 7.1%, followed by the power are increasingly concerned regarding more foreign capital center and suburban office sectors. The simple average increasing prices and the limited, quality product for sale. across all sectors was 6.16%.
. Terminal capitalization rates increased within four of the major commercial property sectors, including 17 to 23 BPS PwC Real Estate Barometer 4Q17 increases in the strip center, suburban office and power The PwC Real Estate Barometer was introduced as a system center sectors. Slight losses were recorded in the for analyzing historical/forecasted CRE data within the four warehouse, apartment and regional mall sectors. major U.S. property sectors. The barometer indicates where a . The apartment (5.7%) and warehouse (5.9%) sectors had major property type is positioned within the real estate cycle, the lowest terminal capitalization rates. Suburban office which consists of the following four phases: contraction, (7.6%) assets had the highest terminal capitalization rate. recession, recovery and expansion.
. IRRs increased from the prior quarter in three of the major . More than half of the tracked office markets were in the commercial property sectors, including 31 and 25 BPS expansion phase of the real estate cycle, the highest escalations within suburban office and strip center sectors, among the major sectors. Market fundamentals are respectively. The largest decreases were recorded in the projected to soften somewhat during 2018 as new supply CBD‐office (8 BPS) and warehouse (5 BPS) sectors, may exceed demand in selected markets, but the respectively. adjustment may be minor as new supply remains generally constrained as compared to previous cycles. . Warehouse properties had the lowest IRRs, followed by the CBD‐office sector. The highest IRR’s were recorded within . About 41.0% of the tracked retail markets are in the the suburban office and flex/R&D sectors. recession phase of the real estate cycle, which is considerably higher YoY. Store closings and retail bankruptcies are expected to further shrink brick and mortar footprints. On the positive, 31.0% of the tracked
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markets are in the recovery phase, consistent with the Below are changes within the major RCA commercial property prior quarter. indices since December 2007. . Despite strong market fundamentals, nearly half of the RCA Commercial Property Price Index tracked industrial markets are in the contraction phase, National All Property vs. Apartment vs. Core Commercial as new supply is outpacing demand. During 2018, more Index markets are expected to enter the contraction phase as 170 rents moderate and vacancies rise. 160 150
140
. Approximately 70.0% of multi‐family markets are in the 130 contraction phase, primarily resulting from new supply 120 110 Apartment Index Avg additions having outpaced demand; however, investors 100 National All‐Property Index Avg noted that oversupply issues are expected to be short‐ 90 Core Commercial Index Avg 80
lived due to sustained demand and a preference to own 70
60 Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr rather than rent. Aug Dec ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 08 09 10 11 12 13 14 15 16 17 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 Below is a snapshot of each major property type as of 4Q17. National All‐Property Apartment Core Commercial . The National All‐Property Composite Index (the “Index”) Office Retail increased 1.3% during 4Q17. Growth was stronger within 11% 17% the apartment sector, which gained 2.6% versus a 0.5% 33% increase for the core commercial sector. 41% 56% 4% 31% . Within the core commercial sectors, pricing within the 7… suburban office sector increased 0.6% during 4Q17. Expansion Recovery Expansion Recovery Recession Contraction Recession Contraction . 4Q17 price appreciation was slightly stronger in non‐major Industrial Multi‐Family markets (1.5%) than in major markets (1.4%).
13% 3% . The Index increased 7.1% YoY. Prices are reported to be 47% 13% more than 23.0% above their pre‐recession peak. 53% 71% . The apartment sector was the top performing sector, as 2% Expansion Recovery pricing increased 10.6%, representing an increase of 350 Expansion Contraction Recession Contraction BPS over the Index gain. Source: PwC . The retail sector posted a YoY gain of 1.1%, considerably lower than the other sectors, due in part to the growing RCA Commercial Property Price presence of online retailers and store closures/downsizings. Index (CPPI) . YoY, pricing increased faster within major markets (8.5%) than in non‐major markets (7.1%). The RCA Commercial Property Price Index (CPPI) is a periodic same‐property investment price change index of the U.S. The following chart illustrates cumulative price returns for the commercial investment market based on Real Capital Analytics primary sectors in the CPPI from one month to ten years.
(RCA) data. RCA collects price information for every U.S. RCA CPPI commercial property transaction over $2.5 million. The index Cumulative Returns by Sector/Type 1 3 1 3 5 10 tracks same‐property realized round‐trip price changes based Index Month Months Year Years Years Years purely on the documented prices in completed, contemporary property transactions. The methodology is an extension of Apartment 0.9% 2.6% 10.6% 40.3% 72.8% 59.6% Core Commercial 0.1% 0.5% 3.7% 19.2% 50.7% 4.5% market‐accepted regression‐based, repeat‐sales indices and uses Industrial ‐0.2% 0.0% 6.1% 24.9% 55.6% 12.2% no appraisal valuations. Office 0.1% 0.5% 3.0% 19.3% 52.5% 2.7% CBD 0.1% 0.6% 4.4% 25.9% 68.2% 33.8% Suburban 0.1% 0.1% 1.9% 18.8% 50.2% ‐2.4% Retail 0.0% 0.3% 1.1% 12.5% 40.2% ‐1.5% Major Markets 0.4% 1.4% 8.5% 28.6% 64.6% 39.4% Non‐Major Markets 0.4% 1.5% 6.5% 28.2% 58.8% 15.7% National All‐Property 0.3% 1.3% 7.1% 28.1% 59.9% 23.7% * Represents data as of December 31, 2017
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becoming more selective and are showing more caution in Green Street Commercial response to an uptick in interest and capitalization rates. Property Price Index Investors are also continuing to look toward secondary and tertiary markets in search of greater returns, which is evidenced Green Street’s Commercial Property Price Index is a time series by the stable volume in these areas versus a 14.0% YoY volume of unleveraged U.S. commercial property values that captures decrease in major metro areas. the prices at which CRE transactions are currently being negotiated and contracted. Features that differentiate this index For the first time in 15 years, RCA reported that Manhattan was are its timeliness, emphasis on institutional quality properties, surpassed by Los Angeles as the top market in terms of deal and ability to capture changes in the aggregate value of the volume. Dallas, Chicago and Atlanta rounded out the top five commercial property sector. markets. The Suburban Washington D.C./Virginia and Houston markets recorded the largest YoY increases in sales volume, Little change in aggregate pricing occurred during 2017. while the largest declines were noted in the Manhattan, San Basically, the index has flattened out, as growing income has Francisco and Miami/Dade County markets. been offset by higher capitalization rates. During the past year, pricing in the industrial sector outpaced the other major sectors According to RCA, Blackstone, the largest worldwide private and increased 9.0%. Gains of 1% to 3% were recorded within the equity firm, was the largest buyer and seller of commercial real apartment, lodging and office sectors. In contrast, the mall estate in 2017, in terms of both investment volume and the sector saw values fall by 11% and strip retail declined 3%. number of properties. Specialty sectors not included in the aggregate CPPI, such as 2014 to 2017 sales activity by property type is summarized student housing and health care, witnessed healthy gains of 7% below. and 4%, respectively. Investment Sales Activity Below are changes since December 2007. Dollar Value of Sales Transactions by Property Type (millions) Green Street Commercial Property Price Index $180,000
National Index – All Properties $160,000
135 $140,000
125 $120,000
115 $100,000 126.0- Dec 2017
105 $80,000
95 $60,000
85 $40,000 $20,000 75 $0 65 Apartment Retail Office Industrial Hotel 61.7 - June 2009 55 2014 Dollar Volume 2015 Dollar Volume 2016 Dollar Volume 2017 Dollar Volume Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Source: Real Capital Analytics
Below we look at sales activity, per RCA, by product type. Commercial Property Sales . Apartment. Following seven consecutive annual increases, sales volume fell 7% YoY in 2017. Still, the $150 billion in Analysis activity was the third highest since 2000. Portfolio and RCA reported that investment sales activity fell slightly during entity‐level transactions fell 19% YoY in comparison to a 3% 4Q17 to $117.5 billion (excluding land). Volume fell 13.0% YoY decline for single assets sales. Garden apartment sales, on a quarterly basis as all the major property sectors recorded accounting for 66% of sector activity, decreased 12% YoY volume declines. For 2017, RCA noted that sales activity while volume in mid/high‐rise assets pulled back 4%. registered $445 billion (excluding land), which represents a 7.0% Investors were increasingly drawn to secondary and tertiary YoY decline. Although this represents a second consecutive areas, where more than 70% of deal volume was annual decline, 2017 sales activity was still nearly 10.0% higher transacted. Highlighting activity, Greystar Real Estate than the prior five‐year average. Investors continued to focus on Partners acquired Monogram Residential Trust Inc. and industrial assets, making it the only sector to record a volume Starwood Capital acquired Milestone Apartments REIT in increase. deals valued at approximately $3 billion apiece.
Following a recent trend, the growing gap between buyer and seller pricing expectations has slowed volume, as buyers are
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. Retail. Sales volume fell 18% YoY on sales of about $63 Below are the top buyers of commercial real estate, per RCA, billion in 2017. Despite the $4.6‐billion‐dollar acquisition of during 2017. Equity One Inc. by Regency Centers Corp., there was a 26% Top Buyers (Largest to Smallest) decline in portfolio and entity‐level transactions. 2017 (by Investment Volume) Investment activity in the centers sector (multiple tenant Office Industrial Retail space of 30,000 sf or more) fell 23% as compared to an 8% Blackstone Digital Realty Regency Centers decline in the shops sector (usually single tenant of under CBRE Global Investors Blackstone Madison International HNA Group Fireside Investments TIAA 30,000 sf). Among the retail subtypes, sales of grocery‐ HTA (REIT) DRA Advisors Cardinal Ca pi ta l anchored centers and single‐tenant properties improved Brookfield AM Gramercy Fortress Ca p Investors 13% and 9% YoY, respectively; however, declines of 75% Rockpoint Group Duke Realty CBRE Global Investors and 21%, respectively, were recorded for regional mall and GIC Medina Ca pi ta l Rea l ty Income Corp. urban/storefront properties. Apartment Hotel Overall GIC RLJ Lodging Trust Blackstone . Office. Investors continued to gravitate towards suburban Greystar Blackstone GIC locations, where pricing is more favorable. During 2017, Blackstone Xenia Starwood Ca pi ta l office sales fell 8% YoY to $132 billion, driven by a 21% Starwood Ca pi ta l AHIP REIT Regency Centers APG Group Summit Hotel Properties Digital Realty decrease in CBD office sales. In contrast, investment activity Harbor Group Int'l Hospitality Props Trust Greystar increased 2% YoY in the suburbs, where nearly 65% of all CPP Investment Board Carey Watermark 2CBRE Global Investors sales were transacted. While more deals were executed in secondary/tertiary markets, major metropolitan areas saw Below are the top sellers of commercial real estate, per RCA, a 15% YoY decline in sales volume. Still, Manhattan during 2017. witnessed the highest investment volume, helped by the Top Sellers (Largest to Smallest) $2.2 billion sale of 245 Park Avenue to the HNA Group. The 2017 (by Investment Volume) medical office subsector recorded a 23% YoY increase in Office Industrial Retail Beacon Ca pi ta l Partners OakTree Equity One (REIT) deal volume, driven by the Healthcare Trust of America Inc. Brookfield AM TPG Ca pi ta l DDR acquisition of Duke Realty for an estimated $2.8 billion. Blackstone Related Compa ni es Fores t Ci ty Cl a ri on Partners Bain Ca pi ta l Reta i l Props of America . Industrial. There was robust investor demand for industrial Duke Realty TA Realty Blackstone assets, fueled by the growing needs of users and investors JP Morgan Prologis Albertsons LLC for modern warehouse space. Transaction volume totaled NYSTRS Blackstone Sears Holding Corp. Apartment Hotel Overall $72 billion in 2017, up 20% from the prior year, making this Monogram Res Trust FelCor Lodging Blackstone the only major property sector to post an annual gain. Milestone APTS REIT Blackstone Equity One (REIT) Driven by a 44% YoY increase in portfolio and entity‐level Starwood Capital Hyatt Hotels Brookfield AM transactions, total activity was the second highest on Lone Star Marriot JP Morgan Harrison Street RE Ca p MCR Development Beacon Ca pi ta l Partners record. Sales of warehouse properties accounted for 70% of Fairfield Residential Nobel Investment Group Clarion Partners total volume. Highlighting activity, Digital Realty acquired Blackstone Pacific Hospitality Group TA Realty data center developer Dupont Fabros Technology and its
buildings for a reported $7.8 billion.
. Hotel. Deal volume weakened 24% during 2017 in comparison to the prior year as about $27.5 billion of sales were executed. Portfolio and entity‐level sales volume fell 62% YoY in comparison to just a 3% YoY decline for single assets. Full‐service hotels recorded a 34% YoY decrease in sales volume versus a 1% increase for limited‐service hotel assets. Volume stayed steady in secondary and tertiary markets, where about 70% of deal volume occurred.
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In addition to the preceding data, we have also analyzed RCA Significant 4Q17 Sales Transactions historical sales activity by buyer type. The following tables summarize noteworthy sales executed . Private buyers continued as the most active buyers of real during 4Q17 in the major CRE sectors per CoStar. estate in 2017, acquiring $229 billion of CRE assets. This Office Sale Transactions represented near half of total transaction volume and was Sale Price Address/Name City, State Size (SF) Buyer(s) ($ mil) comparable to 2016 volume. 825 Eighth Ave ‐ One Worldwide Plaza New York, NY 2,080,000 $1,725.1 RXR Realty 100‐200‐222 N Sepulveda Blvd El Segundo, CA 1,588,089 $605.5 Starwood Capital Group . 685 Third Ave New York, NY 650,995 $467.5 Unizo Holdings Company, Limited Acquisition volume by institutional/equity buyers totaled 1800 M Street NW Washington DC 580,930 $421.0 Allianz Real Estate of America LLC nearly $103 billion during 2017, down 21% from 2016. 425 106th Ave NE ‐ Centre 425 Bellevue, WA 356,909 $313.0 RFR Realty LLC 1812 Boren Ave ‐ Tilt49 Seattle, WA 290,573 $268.5 Takenaka Corporation (U.S.A.) Market share declined from 26% to 22% of total volume 1401 Lawrence St Denver, CO 311,015 $225.0 Heitman during the past 12 months. Industrial/Flex/Data Center Sale Transactions Sale Price Address/Name City, State Size (SF) Buyer(s) ($ mil) . International investment in U.S. CRE totaled about $51 505 N Railroad Ave ‐ Chicago Data Center Northlake, IL 251,141 $315.0 Digital Realty Trust 44 and 48 Station Rd Cranbury, NJ 1,240,967 $168.5 Clarion Partners billion in 2017, accounting for 11% of total sales volume and Northgate Industrial Portfolio (2) San Bernardino, CA 1,025,324 $95.6 Westcore Properties Southwest Commerce Center (6) Reno, NV 1,029,700 $93.2 AEW Capital Management down about 25% from last year. 2315 and 2335 NW 107th Ave Doral, FL 1,007,019 $85.5 Foundry Commercial 135 William T Morrissey Blvd Dorchester, MA 703,000 $81.0 Alcion Ventures . Investment volume totaled nearly $50 billion in 2017 for 20901 Krameria Ave ‐ Building A Riverside, CA 1,000,000 $80.1 Invesco Advisors, Inc. Retail Sale Transactions listed funds/REITs, up from $40 billion in 2016. Sale Price Address/Name City, State Size (SF) Buyer(s) ($ mil) Centerton Square (9) Mount Laurel, NJ 426,415 $129.6 Prestige Properties & Development Co. 4Q13 to 4Q17 sales activity by buyer type is summarized below. Whittwood Town Center (17) Whittier, CA 785,615 $123.0 Kimco Realty Corporation Belden Park Crossings (6) North Canton, OH 482,534 $67.0 Stark Enterprises, Inc. Vestavia Hills City Center (7) Vestavia Hills, AL 394,294 $60.3 Katz Properties LLC Investment Sales Activity Southern Hills Mall (3) Sioux City, IA 571,001 $55.0 Washington Prime Group Inc. Lake Nona Landing (2) Orlando, FL 178,719 $52.4 Clarion Partners Summary of Transactions by Buyer Plaza Del Lago Wilmette, IL 100,000 $48.3 Retail Properties of America Inc
($ Billions) Multi‐Family Sale Transactions $170 Sale Price Name City, State Units Buyer(s) $160 ($ mil) $150 Westlake & One Lake Front Apts Seatlle, WA 642 $325.0 The Blackstone Group LP $140 Summer House Alameda, CA 615 $230.6 The Blackstone Group LP $130 EOS‐21 Apartments Alexandria, VA 1,180 $227.8 CIM Group LP $120 Tower 12 Apartments Seatlle, WA 314 $225.3 Weidner Apartment Homes $110 Shorewood Heights Mercer Island, WA 645 $210.0 Greystar Real Estate Partners $100 $90 Tower at One Greenway Boston, MA 217 $144.5 PGIM Real Estate $80 Steele Creek Denver, CO 212 $141.5 UDR, Inc. $70 Hospitality Sale Transactions $60 Sale Price Name City, State Rooms Buyer(s) $50 ($ mil) $40 Gansevoort Park Avenue New York, NY 249 $200.0 Highgate Hotels, L.P. $30 Fairmont Copley Plaza Boston, MA 383 $170.0 Ashkenazy Acquisition Corporation $20 WinStar Resort Hotel Thackerville, OK 1,395 $146.5 Global Gaming Solutions $10 Marriott at Legacy Town Center Plano, TX 404 $104.0 ROCH Capital $0 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Atlanta Westin North at Perimeter Atlanta, GA 372 $85.5 Crescent Real Estate Equities LLC Hilton Indianapolis Hotel & Suites Indianapolis, IN 332 $82.5 Southwest Value Partners Crossborder Inst'l/Equity Fund Listed Funds/REITs Private User/other Unknown Embassy Suites Springfield at Ft Belvoir Springfield, VA 219 $68.0 Chatham Lodging Trust Source: Real Capital Analytics Below are the top metropolitan areas for sales activity per RCA. NCREIF Property Index Top Metro Areas The NCREIF (National Council of Real Estate Investment 2017 Investment Volume (Total $) Fiduciaries) Property Index (NPI) is a quarterly time series Office Industrial/Flex/R&D Retail Ma nha ttan Los Angeles Los Angeles composite total rate of return measure of investment Los Angeles Chicago Chicago performance of individual CRE properties acquired in the private Boston DC VA Suburbs Manhattan market for investment purposes only. Properties in the NPI are Houston Dallas Dallas accounted for using market value accounting standards. NCREIF San Francisco Atlanta Houston requires that properties included in the NPI be valued at least Apartment Hotel Overall Dallas Los Angeles Los Angeles quarterly using standard CRE appraisal methodology. Each Atlanta Manhattan Manhattan property must be independently appraised a minimum of once Los Angeles Dallas Dallas every three years. The capital value component of return is Denver Atlanta Chicago predominately the product of property appraisals. When Chi ca go DC VA Suburbs Atlanta entering the NPI, properties must be 60% occupied; investment returns are reported on a non‐leveraged basis and properties must be owned/controlled by a qualified tax‐exempt institutional investor or its designated agent.
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NPI General Recap
. Although gains remained modest, NPI total returns NCREIF Composition by Market Value Property Type Region increased 10 BPS from last quarter to 1.80%, comprised of a Office 37.0% West 38.5% 1.16% income return and a 0.64% capital appreciation Apartment 23.8% East 32.8% return. Total returns registered 1.73% (1.14% income return Retail 23.2% South 19.9% and a 0.59% capital appreciation return) during 4Q16. Industrial 15.3% Midwest 8.7% . Total one‐year returns registered 7.0%, 100 BPS lower YoY. Hotel 0.8% The average quarterly return during the past 5 years was nearly 2.5%. NPI Annualized Returns by Property Type
. Despite modest growth, it was reported that overall market . Spreads between the best and worst performing asset fundamentals remained favorable during 4Q17. types registered about 232 BPS (3.28% vs. 0.96%), higher than the 209 BPS spread (3.29% vs. 1.20%) last quarter. Occupancy rates (93.6%) increased to a 16‐year high for NCREIF‐tracked properties. Industrial . Continuing the recent trend, the industrial sector assets had the highest occupancy (96.4%), recorded the strongest price appreciation with a 3.3% followed by retail assets (93.1%). return during 4Q17. The one‐year return of 13.1% outpaced all other property types by at least 690 BPS. 4Q17 trailing year NOI growth was 5.2%, led by gains in the office and industrial sectors. Retail . Within the apartment sector, a 1.6% return was recorded and apartment growth lagged the overall average. during 4Q17, which was slightly lower than the prior quarter. The one‐year return of 6.2% is 110 BPS lower 4Q17 trailing year rental growth was 3.5%, led by than the annual return of 2016. gains of around 6.0% within the industrial sector. Office gains were nearly 5.0% while the retail and . Growth within the retail sector increased 7 BPS from the apartment sectors trended near 2.0%. prior quarter to nearly 1.3%. The one‐year return of 5.7% lagged the 9.0% annual return posted in 2016. NPI Annualized Returns by Region . Returns within the office sector increased 25 BPS QoQ to . The West and South regions had the greatest returns nearly 1.7% during 4Q17. The one‐year return of 6.0% (2.3% and 1.7%, respectively) during 4Q17. One‐year trailed the annual return recorded in 2016 by 20 BPS. returns have been strongest in the West at 8.9%, which . Returns within the hotel sector weakened during 4Q17, was 200 BPS higher than in the South. falling 134 BPS QoQ to about 1.0%. This asset class had . Property gains continued to lag in the East. The region’s the strongest income return for the quarter at 1.9%, but one‐year returns of 5.1% trailed the broader index by 190 recorded its eighth consecutive quarter of depreciation. BPS. Returns of 1.3% were realized during 4Q17. The one‐year return of 4.9% was 20 BPS higher than the annual return recorded in 2016. . Quarter over Quarter (QoQ) gains in the Midwest declined slightly in 4Q17 and the region returned 5.6% Below is a graph showing total returns by property type since during the past year. 2012.
Below is a graph illustrating total returns by region since 2012. NCREIF: Property Type Total Returns 15.0% NCREIF: Regional Total Returns 13.0% 15.0% 11.0%
13.0% 9.0%
7.0% 11.0%
5.0% 9.0% 3.0%
7.0% 1.0%
‐1.0% 5.0% 2012 2013 2014 2015 2016 2017 Apartment Industrial Office Retail Hotel Total Return 3.0% 2012 2013 2014 2015 2016 2017 South West Midwest East National
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posted an 11.4% decline while gains of 3.1% were achieved Equity REIT Analysis within the free‐standing subsector. FTSE National Association of REITs U.S. Real . After little change through the first nine months of the year, Estate Index lodging/resorts REITs gained 5.4% during 4Q17. Total 2017 returns were 7.2%, well off the 24.3% gain last year. As Comprised of 167 REITs, the Financial Times of London and steady business and leisure travel is projected to support London Stock Exchange (FTSE) NAREIT All Equity REITs Index occupancy and RevPAR gains, the increasing cost and (“The Index”) gained 2.5% during 4Q17, despite a slight availability of labor loom as concerns to ownership. December decline. Analysts believed the recent REIT weakness Below is a graph illustrating total returns by property sector from resulted from expectations that the industry will not benefit 2014 to 2017. from the TCJA as much as other corporate sectors, which has shifted some investment into more growth‐oriented sectors. For FTSE NAREIT REIT Performance by Sector the year, the Index has increased 8.7%, similar to 2016. 40.0%
30.0% Still, REITs underperformed the broader stock market during 2017, largely due to concerns regarding performance in a rising 20.0% interest rate environment. According to a January 3, 2018 article 10.0% from REIT.com, Alexander Goldfarb, managing director at 0.0%
Sandler O’Neill & Partners, feels that REITs could come back in ‐10.0% favor in 2018, assuming no signs of a market downturn, as the ‐20.0% valuation gap with the broader market widens. ‐30.0% Industrial Office Retail Apartments Lodging/Resorts Below is a brief overview of selected CRE sector performance. 2014 2015 2016 2017 . Continuing momentum from its 31% return last year, Largest REIT by Market Cap 2017 Returns industrial REITs were again coveted by investors, and gained nearly 21% in 2017, the highest among the major property Below is a summary of the performance of the largest U.S. equity types. Sustained demand for big box distribution space, REITS during 2017. Leading Infrastructure REITs provided resulting from the growth of e‐commerce, has resulted in significant returns (ranging from 33% to 58%) to investors and the continued migration of warehouse users into urban the two largest data center REITs returned between 20% and metro areas to be closer to consumers. 29%for 2017. In contrast, returns within the largest retail REITs were small. Often tied to industrial market performance, data center and self‐storage REITs returned Largest U.S. Equity REITs Market Cap 2017 approximately 28% and 4%in 2017. Name Symbol Sector (billions) Return . Office REIT performance ended 2017 on a positive note, American Tower REIT AMT Infrastructure $60.6 38% returning 3.3% during 4Q17. Still, the 5.3% return for 2017 Simon Property Group Inc. SPG Retail $53.6 1% Crown Castle International Corp. CCI Infrastructure $44.7 33% underperformed the prior year, when investors saw gains of Public Storage PSA Storage $36.3 ‐3% 13.2%. Analysts continue to be concerned about Equinix, inc. EQIX Data Center $35.3 29% employment and rental rate growth. Prologis Inc. PLD Industrial $34.2 6% Weyerhaeuser Co. WY Timber $26.5 22% . Despite posting a 1.5% loss during 4Q17, apartment REITs Avalonbay Communities Inc. AVB Residential $24.6 3% gained 6.5% during 2017 versus 4.5% in 2016. Favorable Welltower Inc. HCN Healthcare $23.4 1% Equity Residential EQR Residential $23.3 2% demographics and the increasingly high cost of Digital Realty Trust Inc. DLR Data Center $23.3 20% homeownership have sustained demand despite a growing GGP Inc. GGP Retail $22.1 ‐3% supply, which has moderated rental growth in many metro Ventas Inc. VTR Healthcare $21.3 1% areas. Boston Properties Inc. BXP Office $20.0 6% SBA Communications Corp. SBAC Infrastructure $19.8 58% . Although retail REITS posted a 4.8% loss in 2017, the sector Realty Income Corp. O Retail $16.1 4% rebounded in 4Q17 with a 6.8% gain, the highest among the Essex Property Trust Inc. ESS Residential $15.8 7% Vornado Realty Trust VNO Diversified $14.8 ‐4% major property sectors. The regional mall subsector Host Hotels & Resorts Inc. HST Hotel/Lodging $14.7 10% returned 10.3% during the quarter, but posted a 2.7% loss Alexandria Real Estate Equities Inc. ARE Office $12.5 21% for the year. During the year, the shopping center subsector Source: Yahoo Finance, REIT.com
15 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
Stock Market Recap Total Capital Raised by REITs (in billions) $95 $90 $85 Stocks continued to provide robust returns for investors and $80 $75 advanced to record high levels during 4Q17. Both the Dow Jones $70 $65 Industrial Average (+10.3%) and the S&P 500 (+6.2%) recorded $60 Average $55 $50 their ninth consecutive quarterly advance and The NASDAQ $45 $40 (+6.2%) recorded its sixth straight quarterly gain. Volatility $35 $30 remained light and the CBOE Volatility index fell to its lowest $25 $20 $15 level since 1993. Mid‐and large cap stocks outperformed small $10 cap stocks and technology, financial and consumer discretionary 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: NAREIT/ SNL Financial were the best performing sectors within the S&P 500. Bullish sentiment, driven by investor confidence regarding Commercial Lending positive corporate earnings, steady economic growth and the As per 2017 preliminary estimates from the Mortgage Bankers anticipation of the passage of the TCJA, which would reduce the Association’s (MBA) Quarterly Survey of Commercial/Multi‐ corporate tax rate from 35% to 21%, continued to drive stock Family Mortgage Bankers Originations, commercial and multi‐ market strength and resulted in what many observers referred family loan organizations increased 15.0% YoY. 4Q17 commercial to as a market “melt up” during the second half of the quarter. and multi‐family mortgage loan originations increased 10% YoY The following chart highlights the annual returns of Equity REITs and 9% QoQ. in comparison to several of the leading stock market indices. Based on preliminary data, 2017 originations for hotel (+26.0%) During 2017, the technology‐heavy NASDAQ returned 28.2%, and industrial properties (+22.0%) recorded the largest increases outperforming other leading indices and equity REITs. among property types YoY. Retail was the only property type to Index 2012 2013 2014 2015 2016 2017 2012‐2016 record a decline, falling 21%. Among investor types, loans avg originated for CMBS (+43.0%) and Government Sponsored Equity REIT 19.7% 2.9% 28.0% 2.8% 8.6% 8.7% 12.4% Enterprises (+23.0%) recorded the largest increases. NASDAQ 14.6% 12.1% 13.4% 5.7% 8.9% 28.2% 10.9% S&P 500 15.9% 38.3% 11.4% ‐0.7% 12.0% 19.4% 15.4% Jamie Woodwell, MBA’s VP of CRE Research, reported that 2017 DJIA 13.4% 29.6% 7.5% ‐2.2% 16.5% 25.1% 13.0% was a record year for borrowing and lending backed by Source: Yahoo Finance: commercial real estate properties, based on preliminary Capital Raising numbers, adding the increase was driven by multi‐family lending along with overall growth in originations for commercial At a time of continued low interest rates, REITs continued to mortgage‐backed securities (CMBS). He remarked, “Entering benefit from investor demand for their attractive dividends by 2018, there continues to be strong interest to lend by just about raising money in financial markets. This wave of issuance has every major capital source.” been well‐received by investors. According to the January 2018 Senior Loan Officer Opinion After raising $70.2 billion last year, publicly traded U.S. equity Survey on Bank Lending Practices, banks reported that lending REITs raised $92.2 billion throughout 391 capital offerings in standards for CRE loans secured by multi‐family residential 2017, a YoY increase of 31%. Crown Castle International Corp., a properties tightened while loan standards for non‐farm, non‐ communications REIT, raised $3.85 billion, representing the residential properties changed little during 4Q17. Banks also largest capital offering of 2017. reported weaker demand for multi‐family and construction/land development loans during the quarter. In 2017, the specialty sector (comprising data center, student housing and communications REITs) raised nearly $26.7 billion, CBRE’s Lending Momentum Index, which tracks loans originated followed by the $15.6 billion raised by retail REITs, $11.8 billion or brokered by CBRE Capital Markets, fell by 1.2% during 4Q17, raised by residential REITs (comprised of multi‐family, single‐ but increased 14.5% in 2017 versus 2016. The report noted that family, student housing and manufactured home REITs), $10.6 loan underwriting became slightly more aggressive in 4Q17 as billion raised by healthcare REITs and the $8.9 billion raised by loan‐to‐value ratios increased while debt yields declined. office REITs. Senior debt offerings totaled $53.3 billion, followed by $30.4 billion through common stock offerings and $8.5 billion through preferred stock offerings.
Below is a graph showing the capital raised by REITs since 2007.
16 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
The following chart, per the Mortgage Bankers Association, According to Trepp, about 30% of 2017 CMBS issuance was summarizes lending activity by property and investor type. Of concentrated in office properties, followed by the lodging note, originations for hotel assets increased significantly during (28.0%), retail (13.5%), mixed‐use (13.0%), multi‐family (5.30%) both periods while sizeable YoY gains were recorded for and industrial (3.0%) sectors. CMBS/Conduits and GSE’s 2017 issuance exceeded analyst expectations as the CMBS Lending Activity 4Q 2017 market has seemingly adapted to the risk retention rules Type % Change since % Change since enacted in late 2016. Analysts believed these rules would slow 4Q 2016 3Q 2017 issuance by negatively impacting the ability of real estate owners Property Type to refinance loans on their properties; however, during 2017, Industrial ‐17.0% 25.0% Multi‐Family 16.0% 17.0% investors increasingly purchased commercial real estate debt Office 7.0% 9.0% and were benefitted by low interest rates, minimum volatility, Retail ‐40.0% ‐21.0% tighter spreads and a sizeable pipeline of loans in need of Hotel 40.0% 31.0% refinancing. Health Care ‐36.0% ‐28.0% Investor Type Looking ahead, Trepp is predicting that U.S. issuance will decline 27.0% ‐6.0% CMBS/Conduits to about $80 billion in 2018, in part to challenge the sourcing of Commercial Banks ‐5.0% 8.0% new loans from a declining deal pipeline related to loan Life Insurance Co. ‐4.0% 11.0% GSE's (FNMA/FHLMC) 17.0% 4.0% maturities. Overall 10.0% 9.0% U.S. CMBS Issuances Below is a graph depicting the frequency of commercial/multi‐ ($ Billions) family loan originations since 4Q12. $240
$200 Commercial/Multi‐Family Mortgage Bankers Origination Index $160 2001 Quarterly Average = 100 $120 2000 ‐ 2017 Annual Average 330 $80 300 270 $40 240 Average 210 $0 180 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 150 120 Source: Commercial Mortgage Alert 90 60 30 CMBS Delinquency 0 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 According to Morningstar, the CMBS delinquency rate declined for the sixth consecutive month in December to the lowest level Source: Commercial Mortgage Bankers Association since May 2009 as originations outpaced new problem loans and servicers continued to wind down their legacy portfolios. The Commercial Mortgage Backed September 2017 U.S. CMBS delinquency rate registered 2.41%, Securities (CMBS) Market which is 59 BPS lower on a YoY basis. Other notable information from the December report is summarized below. The revitalization of the CMBS market continues as a vital action . The delinquent unpaid balance for CMBS totaled $19.2 for the recovery of the commercial real‐estate market. billion in December 2017, which was $4 billion lower YoY.
CMBS Issuances . By property type, multi‐family properties had the lowest According to data from Commercial Mortgage Alert (CMA), delinquency rates at 0.6%. Office properties had the highest CMBS issuances registered $29.0 billion during 4Q17, the highest delinquencies (6.3%) followed by retail (5.6%), industrial quarterly output since 4Q07. According to Trepp, the lodging (4.9%) and hotel (3.0%) assets. sector (35.0%) accounted for the largest percentage of CMBS . Retail loan delinquencies, at 37.3% of the total, have been issuances during the quarter, followed by the office (24.5%), the greatest contributor to CMBS delinquencies during the retail (12.4%) and mixed‐use (11.6%) sectors. past 12 months and fell 18.2% to $7.1 billion. CMBS issuance registered about $95 billion in 2017, up about 25.0% from 2016, and ramped up quarterly during the year.
17 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
. Office loan delinquencies accounted for 35.0% of the total, growing Hudson Yards neighborhood. In San Francisco, but decreased $1.8 billion or 21.5% YoY to $6.7 billion. Salesforce Tower and First Street Tower, totaling near 2.6 msf, are nearing completion. . Hotel loan delinquencies, representing 9.2% of the total, fell 24.5% YoY to $1.8 billion. . Approximately 621,000 jobs were created in the office‐ using employment sectors during 2017, down 12.5% YoY. . Multi‐family loan delinquencies, representing 6.6% of the Most of the new positions were created in the professional total, decreased 17.7% YoY to $1.3 billion. and business services sector. . Industrial loan delinquencies, representing 4.9% of the total, decreased 13.2% YoY to $934 million. Office Market: Rents vs. Vacancy Rates $27.50 13.5% $27.00 . Delinquencies from deals issued in 2006 and 2007 13.0% $26.50 represented 77.0% of all delinquencies by balance. $26.00 12.5% $25.50 12.0% . The top three states ranked by delinquency exposure were $25.00 11.5% Virginia, California and Ohio, which accounted for 20.0% of $24.50 CMBS delinquencies. $24.00 11.0% $23.50 10.5% . In December, the volume of newly delinquent loans was $23.00 $22.50 10.0% below $1.0 billion for only the second time since 2014. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Asking Rent Overall Vacancy Rate Below is a chart depicting monthly CMBS delinquencies since Source: CoStar (reflects select markets) December 2012. . About 89 msf was completed during 2017, an increase of CMBS Delinquency Balance vs. Percentage 10.5% YoY (CoStar). Apple Park, the 2.8‐msf headquarters
($ Billiions) campus for Apple, in Cupertino, CA, was the most notable $60 8.0% completion. Other top deliveries included 150 North $55 7.0% Riverside Drive (1.2 msf) in Chicago and the 1.1 msf $50 Northwestern Mutual Tower in Milwaukee, WI. $45 6.0% $40 . During 2017, net absorption softened from 113.0 to 76.5 5.0% $35 Delinquency % Average msf from the prior year. Since 2016, nearly all the $30 4.0% Delinquency Balance Average absorption was recorded in suburban markets (68.0 msf) $25 3.0% and most absorption was recorded for Class A assets (48.8 $20 msf). $15 2.0% Dec‐12 Apr‐13 Aug‐13 Dec‐13 Apr‐14 Aug‐14 Dec‐14 Apr‐15 Aug‐15 Dec‐15 Apr‐16 Aug‐16 Dec‐16 Apr‐17 Aug‐17 Dec‐17 CMBS Delinquency Balance CMBS Delinquency % Below is CoStar’s ranking of key market indicators among the Source: Morningstar largest office markets.
4Q17 Top 25 Office Markets Comparison Property Sector Overviews YTD Construction YTD Net Absorption Vacancy Rate Office Deliveries Million SF Best Performing Markets Million SF . 4Q17 office vacancies remained unchanged at 10.2% on Dallas/Ft Worth 5.56 Tampa/St. Pete 7.0% Dallas/Ft Worth 9.09 Washington D.C. 4.37 San Francisco 7.0% Chicago 3.34 both a YoY and QoQ basis. Chicago 3.95 St. Louis 7.1% Houston 3.24 Seattle 2.70 Long Island 7.2% Denver 3.19 . YoY, asking rental rates increased 4.2%, representing the Boston 2.63 Minneapolis 7.3% Seattle 3.16 sixth consecutive year of growth. CoStar reported that Class Philadelphia 2.25 Seattle 7.6% Boston 3.12 A asking rental rates were about $8.50/sf higher than for Phoenix 2.00 Kansas City 7.7% Washington D.C. 3.11 St. Louis 1.89 Boston 7.9% Atlanta 2.67 Class B space. Atlanta 1.89 New York City 8.1% Los Angeles 2.31 Detroit 1.77 Philadelphia 8.3% Orange County 2.13 . According to leading brokerages, tenants continued to expand and lease increasing amounts of space in areas with large concentrations of technology companies.
. Nearly 151 million square feet (msf) was under construction as of 4Q17, a slight decrease YoY. In Manhattan, development continues to progress on six buildings totaling nearly 13.0 msf, including several buildings within the
18 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
Industrial E‐commerce, which now accounts for little more than 9.0% of . Steady demand for modern distribution space driven by total retail sales, is a significant economic driver that has driven rising e‐commerce sales, a strengthening manufacturing demand for industrial space as retailers continue to adjust their sector and improving global trade has positively impacted supply chain policies to ensure faster delivery times. the industrial sector.
. Vacancy rates declined 20 BPS YoY to 5.0% and are at a E‐Commerce as a Percentage of Total Retail Sales (billions) historically low level. 1,300 10.0% 1,200 9.0% 1,100 . Despite healthy market fundamentals, net absorption 8.0% 1,000 slowed to approximately 310 msf during the year, down 900 7.0% 800 6.0% about 10.0% from 2016 levels. 700 5.0% 600 Industrial Market: Rents vs. Vacancy Rates 500 4.0% 400 3.0% $7.20 10.5% 300 2.0% 10.0% 200 $7.00 1.0% 9.5% 100 $6.80 9.0% 0 0.0% $6.60 8.5% 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 $6.40 8.0% Retail Sales E‐Commerce Sales E‐Commerce Percentage 7.5% $6.20 7.0% Source: Census Bureau $6.00 6.5% $5.80 6.0% Below is CoStar’s ranking of key market indicators among the 5.5% $5.60 5.0% largest industrial markets. $5.40 4.5% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 4Q17 Top 25 Industrial Markets Comparison Asking Rent Overall Vacancy Rate YTD Construction Source: Costar (reflects select markets) YTD Net Absorption Vacancy Rate Deliveries
. To satisfy growing demand, developers delivered about 276 Million SF Best Performing Markets Million SF msf during 2017, a 4.0% YoY increase. It was estimated that Dallas/Ft Worth 22.89 West Michigan 1.7% Dallas/Ft Worth 28.73 Philadelphia 21.38 Los Angeles 2.0% Inland Empire CA 20.38 nearly 40 industrial facilities greater than 1.0 msf were Atlanta 20.55 Orange County CA 2.7% Chicago 18.77 delivered in 2017, including several fulfillment centers for Chicago 17.94 Seattle 3.0% Philadelphia 15.71 Amazon. Inland Empire CA 14.76 Detroit 3.0% Atlanta 15.06 Northern NJ 10.30 Cincinnati 3.1% Northern NJ 9.13 . About 280 msf was under construction as of 4Q17, an Phoenix 9.78 Cleveland 3.9% Houston 8.20 11.0% YoY increase. Work continues on Tesla’s 3.8 million Cincinnati 7.61 Long Island 3.9% Los Angeles 6.63 Los Angeles 7.29 Milwaukee 4.1% Phoenix 6.25 square foot Gigafactory in Northern Nevada, significant Houston 6.75 Minneapolis 4.1% Denver 6.23 facilities for Michelin (3.0 msf) and Volvo (2.3 msf) are Source: CoStar progressing in South Carolina, and development of a 2.8‐ msf data center for Facebook is advancing in New Mexico.
. Leasing was strong to end 2017. Best Buy, Amazon, NFI, Allied Beverage Group, S&S Activewear, Geodis and Home Depot all executed leasing transactions in excess of 500,000 sf during 4Q17.
. Due to limited available modern product, “last mile” distribution facilities, many of which are older facilities in infill and secondary locations, continue to emerge to shorten the supply chain and to facilitate the faster delivery of goods to consumers and businesses.
. Supported by the $5 billion Panama Canal expansion, U.S. seaport and inland port markets continue to drive industrial development and experience significant growth in inbound container volumes.
19 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
Retail . As the supply of physical stores continues to overshadow shopper demand, retailer profits have continued to be . Retail sales increased 5.5% YoY in 4Q17 and reached their negatively impacted, contributing to a surge of store highest level since 2014 on increased consumer optimism closings. During 2017, it was estimated that 7,000 store regarding the labor market and economy. closings were announced, which surpassed the previous high set during recession. . Despite an increasing number of retail closings and bankruptcies, the overall retail vacancy rate fell 20 BPS YoY Significant Announced Retail Store Closings to 4.9% as of 4Q17. The neighborhood shopping center Company Stores Company Stores sector, which comprises about 70% of all retail inventory, Radio Shack 1,470 American Apparel 110 had higher vacancies (7.4%) than the smaller mall (3.9%) Payless ShoeSource 700 Gordman's Stores 101 and power center (4.7%) sectors. Rue21 400 Michael Kors 100 . As space has tightened, asking rental rates increased about Ascena Retail Group 400 Charming Charlie 100 358 100 5.5% YoY. Sears and Kmart The Children's Place Gymboree 330 Dollar Tree 74 Retail Market: Rents vs. Vacancy Rates The Limited 250 Aerossoles 74 $17.50 8.0% hhgregg 220 Macy's 74 $17.00 7.5% GameStop 190 Gap 70 $16.50 7.0% Bebe Stores Inc. 180 Staples 70 $16.00 6.5% Wet Seal 171 CVS 70 $15.50 6.0% Crocs 160 Aaron's 64 $15.00 5.5% J.C. Penney 138 MC Sports 68 $14.50 5.0% Vitamin World 124 Perfrumania 65
$14.00 4.5% BCBG Max Azria 120 Alfred Angelo 61 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Asking Rent Overall Vacancy Rate Source: Fung Global Retail & Technology
Source: CoStar (reflects select markets) Source: Fung Global Retail & Technology . New development remains modest, as cautious . Dollar store chains (such as Dollar General and Dollar Tree), developers wait for projects to be extensively pre‐leased national discounters (such as TJ Maxx, Ross and Walmart), before breaking ground, typically for single‐tenant and new U.S. grocery chains (Aldi and Lidl) continue to be formats, in locations with strong demographic profiles. the primary drivers of brick and mortar retail growth. . Although the pace of Chapter 11 filings slowed in 4Q17, Significant U.S. store openings are summarized below. numerous retailers declared for bankruptcy protection in Significant Announced Retail Store Openings 2017 in response to consumers’ desire to purchase more Company Stores Company Stores goods online, spend more on travel and experience‐ Dollar General 1,285 Gap 90 related activities, and focus more shopping more at Dollar Tree 650 Walmart 89 discount and off‐price retailers. In September, Toys “R” Aldi 400 Sephora 70 Us filed the third largest retail bankruptcy, only behind TJX 111 Hobby Lobby 60 2002 Kmart and 1990 Federated Department Stores Five Below 100 H&M 46 filings. Ulta 100 Dick's Sporting Goods 43 Significant 2017 Retail Chapter 11 Bankruptcy Filings Lidl 100 Target 32 Company Ross Stores 100 Costco 24 Source: Fung Global Retail & Technology Charming Charlie (4Q17) Papaya Clothing (2Q17) Styles for Less (4Q17) RadioShack (1Q17) Source: Fung Global Retail & Technology Toys R Us (3Q17) Gander Mountain (1Q17) Aerosoles (3Q17) Gordmans Stores (1Q17) Vitamin World (3Q17) hhGregg (1Q17) Perfumania (3Q17) BCBG Max Azria (1Q17) True Religion Apparel (3Q17) Wet Seal (1Q17) Alfred Angelo (3Q17)* Marbles ‐ The Brain Store (1Q17) Gymboree (2Q17) Vanity (1Q17) rue21 (2Q17) Eastern Outfitters (1Q17) Payless ShoeSource (2Q17) Limited Stores (1Q17) * Represents Chapter 7 Sources: CNBC, businessinsider.com
20 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
Apartment Hotel
. According to Reis, Inc. the national vacancy rate increased . During 2017, Smith Travel Research (STR) reported that 10 BPS QoQ and 30 BPS YoY to 4.5%, primarily due to new hotel occupancies increased 0.9% to 65.9%, the average supply being delivered. Vacancies have been slowly rising daily rate increased 2.1% to nearly $126.72 and RevPAR, after bottoming at a cyclical low in 3Q16. increased 3.0% to about $83.57. The absolute values in these three primary performance metrics were each the . Despite the uptick in available units, average asking rental highest STR has ever benchmarked. rates grew by 0.5% QoQ during 4Q17 and 4.2% YoY according to Reis, Inc. Effective rents increased 0.5% QoQ There were also records set for demand (1.23 and 3.6% YoY. billion room‐nights sold) and supply (1.87 billion room‐nights available). . As steady demand for apartments has continued, partly in response to the challenges of home ownership, landlord . According to STR, there were about 1,400 U.S. projects, concessions have lessened, resulting in higher effective totaling nearly 180,000 rooms, under construction as of rents; however, effective rent growth has slowed in recent December 2017. This represents a 3.7% YoY decrease and quarters as concessions have increased due to increasing the third consecutive monthly decline. It was speculated competition. that the decline was due in part to greater difficulty in obtaining financing for new projects. . Apartment deliveries increased to about 66,000 units during 4Q17 and totaled about 220,000 units during the . New hotel construction continues to be focused within the year, slightly higher than last year’s total (Reis, Inc.). upscale segment, which includes select‐service and extended‐stay hotels. Economy class projects have been According to Realpage, the number of apartments limited due to rising construction costs and weaker completed in the U.S. hit a 30‐year high in 2017, performance metrics. driven by completions in the Dallas, New York and Houston metro areas. STR reported that New York had about 12,000 rooms being built across 69 hotels, followed by Apartment Market: Rents vs. Vacancy Rates the Dallas (5,770 rooms in 45 hotels) and $1,400 8.5% $1,350 8.0% Nashville (5,030 rooms in 33 hotels) markets. $1,300 7.5% $1,250 7.0% Lodging Market: RevPAR, ADR & Occupancy $1,200 6.5% RevPAR, ADR Occupancy $130 74% $1,150 6.0% $120 72% $1,100 5.5% 70% $110 $1,050 5.0% 68% $100 66% $1,000 4.5% $90 64% $950 4.0% 62% $80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60% Asking Rent Overall Vacancy Rate $70 58% $60 56% Source: Reis, Inc. 54% $50 52% . $40 50% 2017 net absorption totaled about 168,000 units, off nearly 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 22% from 2016 totals. Given the active pipeline currently RevPAR ADR Occupancy % under construction and reported delays for several projects Source: Smith Travel Research nationwide, absorption is predicted to escalate during the . Of the top 25 markets, 18 reported YoY RevPAR growth next several quarters. as per STR. Houston posted the largest 2017 annual . Apartments incorporated into walkable, mixed‐use increases in RevPAR (+10.5%) and occupancy (+7.1%), developments and near employment centers and transit driven by the effects of Hurricane Harvey, which boosted hubs in urbanized environments continue to highly coveted, demand to accommodate displaced residents, relief but most prospective tenants are driving demand for Class workers and insurance adjustors. Orlando reported the B product in suburban or secondary locations, where rents only other double‐digit rise in RevPAR and Nashville are more affordable. posted the largest YoY rise in ADR (+6.2%). . . Steady demand continues to be fueled by new millennial In absolute values, New York, NY recorded the highest household formations, downsizing baby boomers and levels in occupancy (86.7%), ADR (US$256) and RevPAR existing renters who cannot qualify for a mortgage. (US$222) in 2017.
21 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report – 4th Quarter 2017
Forecast Economic Property Sector
. Steady economic growth in the near term will be supported, . Retail: Although steady consumer spending is expected to in part, by tax cuts to both business and individuals. These persist, brick and mortar establishments will continue to tax cuts along with rising disposable income (from stock consolidate and close stores. As landlords attempt to fill market and housing value gains) should further stimulate these vacancies, new tenants are expected to ask for more consumer spending. concessions and flexible lease terms. Rather than build, developers will continue repositioning older/obsolete retail . Strong global growth along with corporate tax reductions assets into new, consumer driven venues. are expected to boost business spending and investment. . Apartment: Favorable demographic drivers should sustain . After the Federal Reserve raised the federal funds rate demand for rentals as millennial household formation three times in 2017, indications are that a March rate hike continues to rise while more empty nester baby boomers is likely. will look to downsize from owned‐homes into amenity‐filled . An unbalanced housing market is expected to persist in the rentals. Economically, rising home prices will continue to near‐term as historically low inventory levels will not be present affordability challenges to ownership and force able to satisfy demand, which will drive prices higher. potential buyers to remain in rental housing.
. As the economy nears full employment, job growth is . Office: As positions become more difficult to fill, a tighter expected to moderate, but annual wage growth, which had labor market is projected to challenge growth in office‐ trended around 2.5% for the past several years, is projected using job sectors. Raised construction levels are expected to accelerate modestly. to drive up vacancies and to constrain rental growth in select metropolitan markets. Investors and tenants will . After rising 2.1% in 2017, inflation is expected to rise continue exploring suburban locations where less price modestly in 2018, reflecting higher gasoline and energy appreciation has occurred relative to CBD locations. prices. . Industrial: E‐commerce will continue to drive demand for General Property modern distribution space/fulfillment centers and result in supply chain modernization to deliver products to . Spreads between real estate cap rates and interest rates consumers in the fastest and most efficient way. As more are expected to further compress with additional speculative supply enters the market, vacancy rates are anticipated interest rate hikes. As a result, investors will expected to increase in select metropolitan markets and continue looking towards secondary markets, expanding rental rate appreciation will slow modestly. property acquisition beyond core assets and into Class B product and niche property sectors to maximize yields. . Hotel: RevPAR and ADR are projected to grow modestly while the luxury and independent chain‐scale segments are . A divide between seller expectations and buyer valuations likely to report the largest increases in occupancy. President will likely continuing weigh on sales volume despite a large Trump's travel bans and immigration crackdowns may lead amount of capital ready to be deployed by potential to a decline in international travel. The rising cost of labor investors. and the continued rise of home sharing companies (with . U.S. commercial real estate assets will continue to attract lower overhead costs and less regulations) will continue to international investors and support pricing; however, challenge leading hotel flags. investors have increasingly expressed more caution towards
U.S. real estate assets due to interest rate risks, elevated valuations, oversupply (in select markets) and political turmoil.
. Although REITs will continue attracting the interest of investors, returns may be challenged by rising interest rates.
. U.S. CMBS issuance is expected to decline modestly, due in part to a thinning deal pipeline from loan maturities.
22 · FTI Consulting, Inc. EXPERTS WITH IMPACT FTI INSIGHTS Economic & Real Estate Report –4th Quarter 2017
Real Estate and Infrastructure
Every real estate client or stakeholder has unique objectives, constraints, operational circumstances and economic realities. REAL ESTATE CAPITAL MARKETS The FTI Consulting Real Estate and Infrastructure group has the . Capital Markets Advisory deep bench of expertise and experience to help real estate . Investment Sales owners, users, investors and lenders better navigate the . Debt/ Equity Placement, Joint Ventures, and Investment market’s complexities and manage the inherent risks in this Programs climate. For more than three decades clients have relied on our . Merger & Acquisition Advisory creative and sound business solutions to turn these complexities into opportunities. RESTRUCTURING SERVICES . Company‐Owner Advisory As unbiased and independent advisors, we represent leading public and private real estate entities and stakeholders including . Interim Management Services REITs, financial institutions, investment banks, opportunity . Secured Lender and Special Servicer Advisory funds, insurance companies, hedge funds, pension advisors and . Unsecured Creditors/Committees Advisory owners/developers to align strategy with business goals. . Trustee‐Receiver Services Our innovative and results‐driven strategy and superior . Opportunistic Investor Services execution are supported by authoritative, state‐of‐the‐art . §363 Asset Sales financial and tax analyses developed by some of the industry’s foremost experts. . Bankruptcy Administration & Reporting
We offer a comprehensive integrated suite of services: TAX ADVISORY . Tax Structuring, Consulting and Compliance STRATEGIC ADVISORY, TRANSACTION DUE DILIGENCE & . State and Local Tax Consulting MANAGEMENT . Cost Segregation . Valuations . Tax Strategy and Planning Related to Bankruptcy and . Transaction Strategy, Due Diligence and Management Financial Restructuring . Debt/REO Acquisitions and Dispositions . Private Client Advisory . Operations Optimization SPECIAL FOCUS AREAS . Portfolio Optimization . Residential and Commercial Mortgage Backed Securities . Development Advisory . Hospitality, Gaming and Leisure . Lease Consulting . Outsourced Accounting and Financial Reporting . Site Selection and Incentive Negotiation . Executive Compensation and Corporate Governance . Construction Project Management The views expressed herein are those of the authors and are not necessarily the LITIGATION SUPPORT views of FTI Consulting, Inc., its management, its subsidiaries, affiliates or other . Expert Testimony professionals FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and . Investigations and Forensic Accounting is not a certified public accounting firm or a law firm. . Dispute Advisory Services
Marc R. Shapiro Mark E. Field +1 973 852 8154 +1 973 852 8157 [email protected] [email protected]
EXPERTS WITH IMPACTTM About FTI Consulting
FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. For more information, visit www.fticonsulting.com and connect with us on Twitter (@FTI Consulting), Facebook and LinkedIn. www.fticonsulting.com
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